SPEECHES & TESTIMONY

"High-Wire Act"

Commissioner Bart Chilton

February 23, 2012

This is our 24th meeting on Dodd/Frank Rules, and it’s not an illusion that, with each meeting and each new set of rules, the “regulatory balancing act” becomes trickier and the wire gets higher. You can take the analogy a bit further, and query how strong the “safety net” is—believe me, we are taking that into consideration as well, with each new regulation we consider.

The balancing test is particularly evident, for example, with regard to the block trading rule that we are proposing today. While I plan on voting for this proposed rule, I do so with the caveat that we must, as we go forward, be extremely cognizant that all of these swaps rules are an interdependent set. It is a grave error to look at each rule as free-standing—they are not. These swaps regulations—the SEF rule, the block trade rule, the reporting rules, for example—all have to work together, have to be perfectly balanced, in order for the markets to function and for consumers to be protected.

There is an example in Section 733 of the Dodd/Frank Act that provides a good visual of the balancing act we must undertake. In a “rule of construction,” Congress tells us that the goal of that swaps execution facility provision is to 1) promote the trading of swaps on SEFs, and at the same time, with co-equal importance, 2) promote pre-trade price transparency in the swaps market. As we look at the block trading rule, the SEF rule, and the reporting rules—again, in concert—we can see that, if we go too far in, for example, setting block levels too low, we will possibly not promote SEF swaps trading. On the other hand, if we set the block level too high, then we risk impairing the ability of participants to effectively utilize the markets at all. In other words, certain large trades simply wouldn’t happen, because dealers would not be able to efficiently lay off their risk. I look forward to a robust debate on the block trading rule. In particular, I would like to hear from the industry as to whether different block levels are appropriate for commodity swaps as differentiated from all other asset classes, and the rationale for such distinction.

I plan on supporting the internal business conduct rule as well, and I believe we have reached an appropriate equilibrium as to conflicts of interest, risk management issues, and duties and responsibilities of FCMs, swaps dealers, and major swaps participants. The public demands an end to the conflicts-ridden, insidious business practices that they’ve witnessed all too often. This rule represents, in my opinion, a balance that achieves the goals of protecting consumers and allowing markets to work.

And now I’m getting to one of my recurring topics: position limits. (You knew I couldn’t let a meeting go by without addressing this). I’m sorely disappointed that it has been five months since the Commission voted on this rule, and nothing—nothing—has moved forward to begin to impose position limits and address excessive speculation. I understand all the arguments about needing data, but I’m tired—and the American public is tired—of waiting for a swaps definition rule to be promulgated in order for position limits to be effective. There are things we can and should do now, and today I’m calling for them to be done, NOW.

Specifically, in addition to imposition of spot month limits in the 28 referenced contracts in futures and options on DCMs, I am calling for a rule withdrawing the ability of exchanges to utilize position accountability levels in non-spot months for these contracts, and effectively setting limits in non-spot months. Alternatively, if we can get a swaps definition out there—now—the position limits rule can go into effect in 60 days. And I know there may be intractable issues. If that remains the case that would slow down the rule, put those few issues on a separate track and get out the main rule now. I am today, requesting that the agency move on one of these two paths in order to get position limits in place, as ordered by Congress. This is something we can do to protect the American public and to carry out our mandate of ensuring fair prices for consumers. I am mystified as to why we would not aggressively pursue this.

My compass, as always, is the American taxpayer and consumer. I look at the ultimate effect of our regulations on how much a gallon of gas will cost, how much a loaf of bread will cost, what interest rate a family will pay for a mortgage. As we all know, we don’t set prices, but we exist to ensure that prices are fair and that markets work efficiently. If we don’t do that, we shouldn’t be here.

At the same time we are ensuring protection of consumers, we are charged with making sure American risk management markets work effectively and efficiently. Swaps markets, like futures markets, provide a vital and important function in our economy: they allow businesses to effectively and efficiently hedge market risks. If we mess that up—that is, if we don’t get the “balancing act” right and over-correct—then we have hurt the ultimate consumer.

So, I support both items we are considering today, but urge that we figure out a way to move forward definitively with position limits at our March 9th meeting.